U.S. budget drama and the longer-term fundamentals for gold

After a rebound of 1.51% in the U.S. Comex gold futures (COMEX:GCZ13) on Wednesday, the prices fell 0.92% on the next day to $1,323.60. The Dollar Index (NYBOT:DXZ13) has hardly changed after two days. The S&P 500 Index (CME:SPZ13) climbed 0.35% on Thursday after falling 0.27% while the Euro Stoxx 50 Index was at the same level as Tuesday. The 10-year Treasury bond yield is steady at around 2.65% on Thursday, declining for three consecutive weeks.

The U.S. Monetary and Fiscal Policies in Focus

Recent positive factors for gold include the delay in the Fed's tapering and the possibility of a government shut-down on Oct. 1, when the new fiscal year begins. U.S. will also reach its borrowing limit of $16.7 trillion by Oct. 17. The U.S. Republicans want to use the budget negotiation to curtail funding for the ObamaCare, which Obama and the Democrats have rejected. Gold investors were swayed on Thursday as the U.S. jobless claims declined unexpectedly by 5,000 to 305,000 last week while a measure of the consumer confidence by Bloomberg has risen for three weeks, raising again the expectations of the Fed's tapering. However, the pending home sales dropped more than expected by 1.6% for the month of August.

Reviewing the Longer-term Factors in Gold

Despite the somewhat confusing messages from the Fed and its governors and the ebb and flow of economic data, it is useful to re-focus on the longer-term fundamentals of gold. Gold discoveries have fallen off the cliff from 160 million ounces in 1995 to fewer than 5 million ounces in 2011. The average gold production is about 200 tonnes per month while China alone imported about 115 tonnes in July. The Indian import demand has been suppressed by the government's duties hikes, but the Indian consumption (in value terms) has not budged as the culture of saving through gold jewelry is deeply entrenched. Global central banks will likely add another 350 tonnes of gold to their reserves in 2013.

What to Watch

Apart from following the ongoing U.S. budget debate, we will also monitor the September China final PMI on Sept. 30, Yellen's speech, Germany's September unemployment change, and the final September PMI for the U.S. and E17 on Oct. 1, Bernanke's speech and the ECB interest rate decision and press conference on Oct. 2 as well as the Bank of Japan target rate and the September U.S. unemployment rate and non-farm payrolls on Oct. 4.